What are the consequences of credit card default?

Credit cards will be much beneficial for us if we can use them wisely. Overspending through your credit card can make you fall into a debt trap that can hamper your budget and eat all of your future income.

The biggest mistake a credit cardholder can make is not paying the credit card due bills on time. By not paying your pending bills you will step towards increasing debts as you may have to pay penalty charges and interest payments.

If you pay off the entire balance of the credit card in full every month, the credit card company will charge no interest on your due balances. But if you do not pay off the total balance, the credit card issuing bank will charge full interest on the total outstanding balance, starting from the date after your due date.

In India, there are thousands of credit cardholders like you who don’t pay credit card bills totally. As a result they might also face some consequences:

1

High-interest rates will be charged

2

Credit card will be blocked

3

Cardholders might get blacklisted

4

Legal action can be taken against the cardholder

5

Credit score will get a blow

6

Getting difficulties to get new credit

What happens if you don’t pay credit card bills?

1 to 2 missed Payments

The outcome

Late fees

Loss of introductory APR

Penalty APR

Damage to credit score

3 missed Payments

The outcome

Late fees

Increased damage to credit score

Closed credit card account

More Than 3 missed Payments

The outcome

Late fees

Greater to credit score

Debt sold to a collection agency

Lawsuit

Legal steps

A case under the Negotiable Instruments Act will be filed against you if you pay credit card bills via cheque, and the cheque bounces. Apart from that, a case under the Payment and Settlement Act will be filed against you, if somehow your payment via electronic transfer (like an auto-debit service) fails due to insufficient funds in your account.

In both cases, the credit card company( bank) should notify the cardholder about the situation and ask for payment within 30 days of the cheque bouncing/auto-debit failure. If you do not make the payments within 15 days of the notice, a case under these sections will be filed against you.

If you fail to pay credit card bills on time or keep increasing credit card debts, it can put you into a blacklist with credit rating agencies such as CIBIL.

How to resolve a credit card default

You may resolve credit card default issues by the following manner:

THIS

If you have enough funds in your bank account, it is best to pay off credit card debts entirely.

or

THIS

You have the option to negotiate with your credit card provider and ask for an easy repayment option.

The credit card provider may allow you to make payments via easy monthly installments. You may even make a minimum payment to keep the cycle rolling and get out from the default list.

The longer you take to make payments, the more critical the situation may become. In the end, a civil case might be filed against you. If you want to avoid this situation, make the minimum payments for every card each month.

Do you need to settle credit card debts?

A credit card is a very useful and important financial instrument if you use it wisely and pay off on time. A credit card is beneficial if you need financial help when you have an emergency. But unfortunately, despite having such benefits, the high-interest rate on credit cards can increase your financial burden.

As of January 2020, the average credit card interest rate is 21.28%. So, if you keep a credit card for several months and do not make bill payments on time, it can make your debts rise without any limitations. A big amount of this debt would be just the interest charges.

So, if you can’t afford to pay such huge debts at a time, contact your credit card company and negotiate. You may settle your credit card debts into a lower amount than what you have actually owed. But debt settlement has an immense effect on your credit score.

The Impact on your credit score

Settling your credit card debts with a bank is harmful to your credit as it may severely affect your CIBIL score. Having a good CIBIL score nowadays is the most desired thing for any person, as it will help your credit applications to get approved easily. A lender or a credit card company will always fetch your score while reviewing your credit application. A good credit score helps you to get low-interest offers and easy approvals for almost all the credit cards and loans. Similarly, a bad credit score or a poor credit score will do the opposite. It will reduce your chances of getting future loans for a limited time.

So, as credit card debt settlement harms your credit score, it is not a good idea to opt for this option. Instead, you can talk to your credit card company (bank) and request them to suggest easy repayment options. If they allow you to make payments via monthly installments, make sure you pay those installments on time every month. You should also stop using that card for a while.

Disclaimer: All information provided on the website are for information purposes only. At most, it can only be used to help understand financial situations efficiently. It is not to be confused for legal advice or legal references, under any condition or circumstances.